DrKW criticises CLS for not introducing central clearing
Continuous-linked settlement (CLS), the global system to reduce foreign exchange transaction risk, should have been set up to provide banks with a centralised clearing facility, rather than just to eliminate ‘Herstatt risk’, according to a senior banker at Dresdner Kleinwort Wasserstein (DrKW), the investment banking arm of Dresdner Bank.
Unlike other markets, such as equities, there is no central clearing facility for foreign exchange trades. Central clearing organisations guarantee trades by acting as the counterparty on both sides of a transaction. As they are typically highly rated, they lower the average credit risk associated with a trade. They also allow for anonymous trading regardless of how well capitalised a market participant is.
CLS is designed to settle trades on a net-funded basis over a period of time when country-specific real-time global settlement systems overlap.
Wilkinson said that when regulators pushed the world’s biggest banks to come up with a system to get rid of Herstatt risk – the risk that time-zone differences could lead to one party to a trade defaulting before it has paid out on its side of a contract – the banks involved “all got on the bandwagon”, without looking at what they would get for their money.
“The central banks said we need to eradicate Herstatt risk without realising that the best way to do it is through a central clearing environment, with all its add-on benefits,” added Wilkinson.
These benefits, he said, include increased liquidity and reduced capital requirements.
Only users who have a paid subscription or are part of a corporate subscription are able to print or copy content.
To access these options, along with all other subscription benefits, please contact info@risk.net or view our subscription options here: http://subscriptions.risk.net/subscribe
You are currently unable to print this content. Please contact info@risk.net to find out more.
You are currently unable to copy this content. Please contact info@risk.net to find out more.
Copyright Infopro Digital Limited. All rights reserved.
As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (point 2.4), printing is limited to a single copy.
If you would like to purchase additional rights please email info@risk.net
Copyright Infopro Digital Limited. All rights reserved.
You may share this content using our article tools. As outlined in our terms and conditions, https://www.infopro-digital.com/terms-and-conditions/subscriptions/ (clause 2.4), an Authorised User may only make one copy of the materials for their own personal use. You must also comply with the restrictions in clause 2.5.
If you would like to purchase additional rights please email info@risk.net
More on Settlement risk
Margin settlement risk and its effect on CVA
Sponsored feature: CompatibL
CLS to replace core settlement system
Overhaul will leverage conventional technology rather than blockchain solution that underpins new CLSNet service
Netting no problem for blockchain, tech firms tell regulators
Firms say DLT can sit with current market practice, but instantaneous settlement 'not desirable'
Distributed ledger innovators imagine a world without CSDs
CSDs counter they fulfil functions blockchain cannot, and regulatory changes are needed to disintermediate them
Banks eye Traiana for EM forex netting service
Industry turns to utility as CLS emerging markets push stalls
Euroclear and Clearstream granted time to agree joint road map
Icma ERC continues to push for plans to improve Bridge settlement times
CLS facing obstacles adding RMB to its platform
RMB volumes set for growth but settlement remains an issue
FX clearing a priority for 2014, vows CLS chief
Working with banks and CCPs to facilitate central clearing of OTC forex options is 'high priority strategic initiative' for CLS this year, says chief executive David Puth